Neutral: SP500 Levels, Refreshed

Takeaway:Why buy a market that was overbought for the wrong reasons (Fed randomly devaluing the Dollar) when it’s not yet oversold?

POSITION:5 LONGS, 5 SHORTS @Hedgeye

I don’t know about you, but ever since Bernanke moved the goal posts again, I have no idea what to do. Whenever that happens, I take down both my gross and net exposure.

Across our core risk management durations, here are the lines that matter to me most:

Immediate-term TRADE overbought = 1725

Immediate-term TRADE support = 1682

Intermediate-term TREND support = 1655

In other words, why buy a market that was overbought for the wrong reasons (Fed randomly devaluing the Dollar) when it’s not yet oversold? You could have bought all your wanted with the SP500 at 1630 in AUG – and we did.

Not here – not now. No thanks, Ben.

KM

Keith R. McCullough Chief Executive Officer

Share

Print

09/24/13 10:10 AM EDT

A Breakdown of Staples & #RatesRising

#RatesRising has been one of the most important 2013 themes our macro team has written on at Hedgeye. The implications for the Consumer Staples sector are significant as the evidence suggests that yield-starved investors may have sought refuge in the ample yield offered by consumer staples stocks during the 2009-2012 period. Here we detail our thoughts on the space following last week’s surprise announcement and our view on individual names.

Summary: We continue to favor stocks with strong fundamentals, organic sales growth and strong cash flow, over slower-growth, high yielding stocks. Despite the “no taper” decision from the Fed last week, we believe 2009-2012 yield-chasing capital will continue to flow out of staples with poor fundamental outlooks, even if “attractive” yields perpetuate favorable sell-side sentiment.

Highest inverse correlation between the 10-year yield and staples price action over the last 6 months:PM, KO, KMB

Food processors are more strongly driven by corn, #RatesRising a good thing (strong $)

We like LO, BNNY, SAM, EL, CL on the long side

We are bearish on KO, DPS, ENR and KMB

A Topic du Jour: As the chart below illustrates, the prospect of the Federal Reserve lightening the pressure on the accelerator has garnered increasing levels of attention from the markets since the second quarter. Last week’s surprise move by the Federal Reserve to delay a tapering of its bond purchases certainly registered with investors in the consumer staples sector. The “no taper” announcement spurred a significant one-day move in all equities, particularly those that had underperformed as the expectation of rates rising grew.

While we recognize the change in the Federal Reserve’s tone, the shadow of “tapering” could continue to weigh on certain names within the sector, particularly if the economic (employment) data continues to support a tightening of the QE spigot.

The Intermediate-Term TREND Has Been Dominated by “Rates Rising”: We’ve shown the chart below in earlier notes, but it is worth highlighting again. During 2009-2012, the data suggested that many investors sought out staples and other dividend-yielding, stable, sectors for a reliable yield. This would suggest that much of the capital flowing into staples may have been more focused on yield than fundamentals, which then resulted in some capital exiting the group as expectations increased that the Fed would taper. Indeed, on a stock-by-stock basis, it seems that some performance has been inversely related to dividend yield over the past six months, with the exception of sentiment-driven groups like the Food Processors where, with a strengthening of the dollar pushing corn prices lower, the result can coincide with stronger profit margins.

Below, we highlight the sectors of the S&P 500 and their performance relative to each other. We also break out the subsectors of the Consumer Staples sector and highlight their respective price actions relative to the average S&P 500 sector.

Food, Food Processing, & Tobacco: The correlation between Food Processing stocks and the 10-year yield, overall, has been positive over the last six months as the corresponding strength in the U.S. dollar offered respite from the margin pressure associated with high corn prices that had weighed on SAFM, TSN, and several others in the space. Within the food space, BNNY remains a favorite on the long side. We expect investors to continue to pay up for the outperformance of the organic players. BNNY is showing strong penetration into the mainstream aisle and we believe its new product roll-outs in frozen meals (as frozen pizza gets back on track), alongside continued strength of mac & cheese, and crackers and fruit snacks should allow the company to meet its FY sales guidance of 18-20% and EPS range of $0.97 to $1.01. Its skew to a higher income client should maintain these results despite any swings in the macroeconomic landscape that could come into year-end.

Tobacco stocks' performance has largely reflected weakening volume trends that have only been partially offset by pricing. We continue to like Lorillard’s (LO) portfolio of full-flavored offerings and dominate share in menthol, yet a concern remains around any update the FDA may give on menthols. There’s been much excitement around the e-cigarette category. LO’s Blu e-cig remains the market share leader and, while its sales are around 1% of the portfolio, we see strong category excitement outweighing the contribution that e-cigs are adding to earnings.

Beverages & Alcohol: Beverage consumption of carbonated soft drinks continues to suffer due to shifting health and wellness trends, with KO and DPS two names on our short list. The category has been hit by volume pressure and “unfavorable weather” in recent quarters. We largely remain on the sidelines, given the lack of excitement. Alcohol has held up better than most of its peer categories over the last 6 months and on the beer side our theme remains the outperformance of the craft segment. SAM’s price performance has been an absolute rocket ship and we expect its decision last quarter to invest in its growth to be effective.

Home Products: The stocks that performed the worst under the “tapering” scenario of the last 6 months were those with the highest yield and the weakest fundamentals. KMB is the standout, in this regard, as the bull case became increasingly dependent on cost savings and share repurchase-driven earnings growth in an environment where investors were less willing to pay a premium multiple for yield with little organic growth. Other names within the space, like CL, that are posting strong organic growth numbers and face a relatively benign cost environment, are more attractive than KMB on the long side.

We remain bearish on KMB as, despite the extension of QE as we know it, we believe it is unlikely that the Staples investing environment will revert to that which typified the 2009-2012 period, when it seems fundamentals were of lesser importance than the stability of the respective yields of consumer staples stocks relative to the concurrent decline in treasury yields. The fundamental outlook for KMB suggests further downside to earnings expectations.

Personal Care: Our view of stocks within this sector is less sensitive to interest rates, as companies like EL are growing earnings at a high-double digit rate with investors holding the stock for growth and not yield. Companies like EL, with ample opportunity in developed and emerging markets, with exposure to the high-end consumer, are attractive to us on the long side.

We remain bearish on ENR as the company continues to struggle versus larger players in the promotion-driven men’s razors category. As with KMB, the ENR bull case hinges on cost savings and potential upside in the earnings multiple; while we expect the company to meet earnings expectations this year, we believe a continuing preference of growth over yield makes a meaningful multiple expansion from here unlikely over the intermediate-term TREND (3-6 months).

Matthew Hedrick

Senior Analyst

Rory Green

Senior Analyst

Share

Print

09/24/13 10:01 AM EDT

[Video] Keith's Macro Notebook

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

What’s New Today in Retail (9/24)

Not a good week for Retail Sales data so far, as the ICSC yy % change clocked in at +1.6%, matching the lowest reading since May. We traditionally see a strong sequential uptick in week 38, but someone forgot to tell the consumer. Let’s see if the chilly start to Fall helps next week’s data.

"Holiday hiring by U.S. retailers may fall about 6.9 percent this year as shaky consumer confidence and more efficient store practices reduce demand for seasonal workers, according to Challenger, Gray & Christmas Inc."

"Retailers will hire about 700,000 temporary staff this year, down from 751,800 last year, the Chicago-based employment consulting firm said today in a statement. Last year’s hiring was a 12-year high and up 14 percent from 2011, the firm said."

"Wal-Mart said today that it would boost holiday hiring to 55,000, a 10 percent increase from last year’s 50,000 seasonal hires. The company also will move 35,000 workers to full-time status from part-time and another 35,000 to part-time from temporary."

"[TGT] said in a post on its website last week last week it would take on about 70,000 workers, 20 percent fewer than a year earlier."

"[KSS] said last week that it plans to hire about 53,000 workers for the holiday season. That number will include 6,400 seasonal positions at distribution centers and about 40 workers per store…"

Takeaway: We find it interesting that employment will be down this holiday, despite the fact that the retailers will be going up against very easy sales compares from a poor 2012 holiday. Seems very backward-looking.

"...KKR is pushing, along with a partner to cut a deal as soon as this week to buy Jones Group...The Post has learned."

"'The goal is to have it wrapped up before the deadline' for second-round bids, according to a source close to the process, noting that the deadline is this week….KKR covets Jones’s fast-growing footwear brands, including Kurt Geiger and Brian Atwood, according to insiders briefed on the auction. Sycamore is circling Jones’s aging women’s-apparel brands, including Anne Klein, Gloria Vanderbilt and l.e.i., sources said."

GIL - Gildan Announces Planned Major Investment in Further New U.S. Vertical Yarn-Spinning Facilities

"Gildan Activewear...announced today that it is evaluating potential sites in the Southern U.S. for the construction of two additional yarn-spinning facilities, to support its projected sales growth and further reinforce its position as a global low-cost manufacturer."

"The Company currently expects to invest in excess of U.S. $200 million during fiscal 2014 and 2015 for the construction and ramp up of these new facilities. This investment will be made in addition to the investments announced on November 29, 2012 for a new ring-spun yarn manufacturing facility in Salisbury, N.C., and the refurbishment and modernization of the Company's open-end facilities in Clarkton, N.C. and Cedartown, GA."

Takeaway: Surprising that GIL would look to build in the US. Perhaps it is tapped in Honduras and the Dominican Republic.

"The clothing retailer Abercrombie & Fitch has agreed to make religious accommodations and allow workers to wear head scarves as part of a settlement of discrimination lawsuits filed in California, lawyers announced Monday."

"In court papers filed on Friday, Abercrombie agreed to pay the women a combined $71,000 and unspecified attorney fees. Additionally, it has established an appeals process for workers who believe they were denied religious accommodations."

Takeaway: ANF continues its streak as being one of the worst equal opportunity employers on the planet.

"Puma has signed a renewed endorsement contract with the World's Fastest Man, Usain Bolt. Having partnered with the Jamaican World and Olympic Champion since he was sixteen years old, this new deal will see Puma work with Usain through and beyond the 2016 Olympic Games in Rio."

Takeaway: This is the biggest ‘no-brainer’ renewal in the sports marketing business. KER’s worst day will be if Nike wakes up and decides it wants Bolt in its stable of athletes. It looks like that won’t be an issue for another 3-years.

"The company’s latest effort to strike the right balance is its new rewards program and the social networking-style app that goes with it."

"The app asks users to upload a photo, customize the display background, and fill in a few personal details. Then it syncs with users’ social networks and distributes reward points when users mentioning the brand on Twitter or Instagram. It also gives credit to those who respond to in-app promotions such as a prompt to buy a vinyl record (a major part of Urban Outfitters’ inventory). The rewards give users a range of perks, including advance warning on sales and early access to popular merchandise and concert tickets."

"While only Web orders over $50 are shipped for free, every product purchased via the app will be delivered gratis."

"Urban Outfitters will also be able to recognize when shoppers are inside a store, though the company is still trying to decide how aggressively it will ping users with location-based offers and information."

"Target announced this week the launch of an enhanced baby experience program in 10 existing Chicago-area stores."

"The test program aims to create a more compelling shopping experience — with an emphasis on in-store service — through a redesigned layout, the service of Baby Advisors and interactive digital content and expert advice in partnership with the parenting resource BabyCenter, the announcement said."

"Sport Chalet, Inc. engaged Capello Capital Corp. to scout strategic partners who can help the California-based sporting goods retailer accelerate its strategic plan, which includes rolling out a new store format, growing online sales and beefing up its data analytics."

"…LVMH...said Monday that it would fight for the right to continue keeping its flagship Sephora perfume and cosmetics store open late at night, after a Paris appeals court ruled that it must close at 9 p.m."

"The appeals court said the chain breached work-time regulations by hosting customers until midnight on weekdays and 1 a.m. on weekends at its store on the famous Paris avenue. Under the ruling, the store will be obliged to begin closing its doors earlier within 10 days, Sephora said."

"Advocates of more-limited hours argue that allowing employees to work late or on Sundays can hurt the country's social fabric, preventing families from spending time together…Recently unions have been filing complaints against retailers for staying open late on the avenue or elsewhere in the city. The union cited grocery store Monoprix as well as Apple…"

Spaziani, who worked at Vuitton from 2004 to 2006, was most recently director of accessories design at Proenza Schouler...He has also been design director of accessories at Balenciaga in Paris and a design consultant for Diane von Furstenberg and Tory Burch in New York. He is to start on Oct. 1…"

"Pier 1 Imports has named Eric Hunter as executive VP of marketing, responsible for the company’s brand image and integrated marketing efforts. He most recently served as senior VP of marketing and acting chief marketing officer for J.C. Penney Co…"

Vera Bradley's EVP - Global Operations has resigned from his position at the company to become the CEO at Shindigz. He will be with the company until 10/21/2013.

GIII - Jeanette Nostra resigns as President of G-III Apparel Group

"Jeanette Nostra resigned her position as President of G-III Apparel Group...Ms. Nostra will remain employed by the Company, supporting the building of the Company’s international business and global product development for the Company’s Vilebrequin business. In addition, on September 19, 2013, the Board of Directors of the Company... appointed Morris Goldfarb, the Chairman and Chief Executive Officer of the Company, as the President of the Company, and elected Ms. Nostra to serve as a member of the Board effective as of September 19, 2013."

"Bangladesh labor protests entered a fourth day after overnight negotiations failed to end a dispute over low wages as garment factory owners reopened plants that supply companies including Wal-Mart…"

"Shipping Minister Shajahan Khan met last night with factory owners and labor leaders in an effort to end demonstrations that forced about 400 of the country’s 5,000 garment factories to close yesterday."

"[H&M]... joined the IndustriALL Global Union in backing the workers’ pursuit of increased compensation. 'We strongly support the workers demand for higher wages,' H&M spokeswoman Andrea Roos said by e-mail. 'Bangladesh is an important sourcing market for H&M and we have on various occasions and also together with other clothing companies, urged the government to raise minimum wages in the textile industry and to revise wages annually.'"

"IndustriALL supports the workers’ 'justified demands,' Jyrki Raina, IndustriALL’s general secretary, said in an e-mail."

China is set to lift its "Great Firewall" and allow Internet users within Shanghai's new Free-trade Zone to access foreign websites and social media services such as Facebook and Twitter, according to a report in the South China Morning Times."

"Shanghai's proposed Free-Trade Zone – which is expected to launch on September 29 – will encompass almost 30-square-kilometers in the city's industrialized east. Strongly backed by new Premier Li Keqiang, the zone will create a Hong Kong-like area within Mainland China for more liberal trade, subject to less financial and business regulation than the rest of the country."

Here's a release from NPD about apparel sales YTD through July. It's dated, but the relative change by category is interesting nonetheless.

Share

Print

09/24/13 08:42 AM EDT

Buy the Dip! Not.

Client Talking Points

DAX

We've said it before here at Hedgeye, and we'll say it again: Respect is earned, not allocated. Over in Germany, Angela Merkel doesn’t have a bunch of Fed heads running around like chickens with their heads cut off making conflicting speeches to manic media people now does she? The DAX “correction” looked nothing like that in the S&P 500. Both DAX, the FTSE and Nikkei are all looking better now than S&P 500. Why not buy them instead?

OIL

With the two greatest threats to Americans at the pump (Syria and Ben Bernanke) finally out of the headline news this morning, Brent is snapping my long-term TAIL risk line of $108.57. That is new. It's also a very good thing on the margin. We need it.

UST 10YR

Mr. Bernanke thinks that down rates is a good thing. Neither I nor the stock market agree. Falling rates is a leading indicator for #GrowthSlowing, and so is a Yield Spread (10-year minus 2-year) that just compressed to +236 basis points wide from 250 (bearish for the Financials yesterday – good for slow growth Utilities) #sad

Asset Allocation

CASH

47%

US EQUITIES

18%

INTL EQUITIES

20%

COMMODITIES

0%

FIXED INCOME

0%

INTL CURRENCIES

15%

Top Long Ideas

Company

Ticker

Sector

Duration

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

HCA

Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward. Near-term market mayhem should not hamper this trend, even if it means slightly higher borrowing costs for hospitals down the road.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks. T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

When God created earth, he was thinking Bill Dudley would set gravity's rules @federalreserve

QUOTE OF THE DAY

“You should never wink at a girl in the dark. Our communications policy is a little off–we should work harder to refine it.” - Dallas Fed President Richard Fisher

STAT OF THE DAY

This week alone, 13 companies are set to begin trading on the Nasdaq and NYSE -- which would be the busiest week for initial public offerings since November 2007. If all those companies make it to the market, that will bring this year's IPO total to 153. At least 200 companies are now expected to debut this year, according to Renaissance Capital. That would be the most since 2007.

09/24/13 07:36 AM EDT

September 24, 2013

BULLISH TRENDS

BEARISH TRENDS

Share

Print

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Thank You!

Your request has been received

You have been added to our list and will receive an email shortly.

If you do not receive an email, please check your spam filter, and then email
support@hedgeye.com.
By joining our email marketing list you agree to receive emails from Hedgeye. This is a distinct and separate service form any of our paid service products. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.